Are minimum wage increases bad for workers?
Fraser Institute “adjunct scholar” Matthew Lau seems to spend a few hours or so every week cranking out articles for Postmedia. Lau’s latest piece is an attack on the Ontario NDP proposal to increase the Ontario minimum wage to $20. It’s not an especially keen critique but given that the Ontario NDP proposal seems pretty decent (at least in the context of a conservative country like Canada) it’s worth engaging with.
Lau opens with a simple equation: if an employer can’t wring $20 of productive output out of an employee, they will be fired, ergo high minimum wages are actually “an act of cruelty” that disemploy low-skill workers. This is Lau’s basic thesis. The problem is that this doesn’t actually seem to occur in the real world.
For instance, a 2013 paper by the economist John Schmitt summarizes much of the existing studies on minimum wage increases, with a particular focus on real-world surveys. He finds that the existing minimum wage research is largely “inconclusive or suggestive of only small economic effects” when minimum wages are increased.
In Schmitt’s telling, the employment relationship is complex and employers and workers have many different ways of managing a minimum wage increase beyond lowering employment headcount. Employers could raise prices, for instance, or reduce compensation to high earners; employees could work harder. He finds that much of the cost of higher wages may be offset by reductions in staff turnover, which is often very costly, and by increased consumer demand driven by greater spending power among lower-income consumers who benefit from the increase.
Even in cases where a negative employment effect is identified, the difference is often small. For instance, the literature review paper that Lau cites finds a weak negative elasticity in employment as minimum wages increase. There’s essentially no argument from conservatives that high minimum wages will produce offsetting unemployment, as even their preferred research suggests the effect would be dwarfed by the increase in wages.
Lau then delves into an indulgent bit of libertarian fantasy where he suggests that all workers are paid according to their “worth” and spins out some scenarios from there. The problem is this simply isn’t true. If all workers were paid according to their productive output, there would be no profit and no capital income, as workers would receive all the dividends from their labour. Any business that generates profit by definition is not paying their workers according to their worth.
In reality, workers are paid according to the lowest amount they are willing to accept, with the threat of impoverishment or starvation as the alternative. Businesses exert a lot of power collectively over workers, power they use to wait out periods of high wage demands (as seems to currently be the case) so they can generate large profits. In the absence of strong unions, minimum wages are a sort of statutory floor workers can rely on to countermand this power to some degree. Otherwise, individual workers at the low end of the labour market are much easier to exploit.
It’s worth noting that a $20 minimum wage is not a particularly ambitious goal. Other high-income countries with higher minimum wages or higher effective minimum wages (as established by sectoral unions) have similar employment outcomes to Canada.
A $20 minimum wage in Canada would be fine. It wouldn’t result in enormous unemployment and would produce some very useful gains for low-wage workers. It’s not aggressive enough, if anything.
The final point I’d make is that all this obsession with preserving employment at every possible margin is not helpful. In countries like Canada, close to half of the population is not working at any given time. This includes children, seniors, disabled people, students, caretakers, and the unemployed.
We have to take care of a massive number of Canadians through welfare programs regardless of some increment of unemployment that may or may not materialize. An additional percentage or two of unemployment among prime-age working people is just not that significant, if that is what achieving a more egalitarian labour market would mean.
Lau’s $20 minimum wage critique is misplaced on a number of levels. A large part of his critique rests on unemployment effects that don’t seem to significantly materialize. The other part is a basic restatement of first-year economics lectures, a favourite tendency of libertarians. Neither should prove compelling to anyone with an ounce of sense.